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Friday, June 13, 2008

iPhone Subsidies

Apple delivered a mixed bag in terms of features upgrades but delivered a solid win with the revamp of their business model and distribution. While a June US launch would have been nice, the 22 country launch on July 11th delivers a broad rollout much more quickly than most had expected.

The key point here is the subsidies that are going to be provided around the world by the handset providers. AT&T is going to sell the 8GB model at an upfront price of $199 but has raised the plan prices by $15 a month. That works out to $360 more over the two year contract.

So what does the customer get in return? Subsidies....and comments from SK Telecom (500,000 to 600,000 Won wholesale price) as well as the Vodafone Italy prepay pricing ($644 for 8GB model) indicate that they will be in the $350-$400 range in the US. The figure is even higher in Europe where they are using their standard practice of varying upfront pricing based on the monthly spend. However, the numbers involved arent particularly unusual considering the fact that the N95 was available for free shortly after its launch a year ago (unsubidized price of $750).

These subsidies are going to drive sales substantially higher. While the total amount paid over the life of the contract wont change much compared to the 2G iPhone, the fact that the upfront price is now below $200 removes a key barrier to entry for customers. That is the price point that has consistently been shown to move consumer electronics products from cutting edge into the mass market. The DVD player is the classic example.